For sellers of real estate properties it is vital to know the true third party verified ability of a potential buyer to obtain the necessary financing when they tender a contract and offer to purchase.
For buyers of real estate it is necessary to understand the true independently verified condition of the same property and evaluate said condition before tendering an offer and entering into a contract.
Current
Traditionally, homebuyers find a home they like, obtain an accepted offer, then go to their mortgage lender, apply for a loan and hope to be approved. Many lenders have been offering to “pre-qualify” or “pre-approve” potential homebuyers before they start making offers on homes. Realtors who represent homebuyers will also suggest to a buyer they are working with in finding a home that they get “pre-qualified” or pre-approved”.
Buyers often obtain an accepted offer with a contingency to obtain a written loan commitment within a certain time frame. Sellers want to avoid taking their home off the market only to find out the buyer cannot qualify for the new loan needed to complete the purchase. So they ask to see that the buyer has been pre-qualified or approved. In addition sellers will ask to see a buyer's credit report and/or ask how much they are putting as down payment towards their purchase. This information provides a false sense of security to a seller, and often is discriminatory to someone with less then perfect credit or who is putting little or nothing down, which has become common in recent years. Sellers often feel more secure with someone who is making a large down payment or has excellent credit. This often isn't reliable. In the height of the recent real estate boom many qualified buyers were unable to purchase a home because sellers were receiving multiple offers and would often take the offer where the buyer was making a larger down payment.
The terms “Pre-qualified” and “Pre-approved” are subjective terms and don't serve any real purpose other then to tell the interested parties that the potential buyers have spoken with a mortgage lender and that lender said they will qualify. In theory the pre-qualify and approval process is to perform a review of a loan application submitted by the homebuyer and include reviewing their credit as well as other documentation needed with the obvious exception of the property appraisal. The problem is no one knows exactly what steps the buyer has gone through and how closely the mortgage lender reviewed the buyer and what steps were used before issuing the Pre-qualify or approval letter. Often times these letters are typed up after only a casual conversation with a buyer and no reviews are done at all. The approval process involves the packaging of all required documentation which is then presented to an underwriter to make a final determination as to qualification for the particular loan program the borrower has requested. Currently there are several major underwriting systems used in the lending industry. Fannie Mae, the largest purchaser of single family residential home loans, offers the most common such system called Desktop Underwriter or DU. Fannie Mae sets the standard for much of the lending industry. One such example is the standard application of all lenders require today is a Fannie Mae Form 1003. Many lenders use the DU system even if the loan is not going to be sold to Fannie Mae. Freddie Mac offers the Loan Prospector application.
In addition to these underwriting systems, most major lenders allow for on-line status of loans that have been submitted to them for funding. After loans are approved through the automated underwriting system, documentation that supports the information entered into the AUS is sent to the underwriter who reviews it for accuracy. When the documents have been accepted the status of the loan is reflected back onto the lenders website.
Problems with current system:
Was a complete application taken or did the lender base their decision on verbal information provided by the Home Buyer?
Has the loan been entered into an Automated Underwriting System (AUS)?
Has an underwriter verified the supporting documentation?
Was the credit report reviewed?
Was the information on the application verified?
Currently, there is no way for an interested party, in particular a seller or his representative, to know these things except to ask for a letter from the potential lender. It's not uncommon for lenders to issue these letters without actually verifying all the pertinent information from a borrower or entering the loan into an automated underwriting system.
In summary, there is currently no way for the seller of a home to understand a buyer's true ability to obtain the necessary financing to purchase a home. The purpose of the present invention is to provide a standard through independent verification of the buyer's financial capability to repay the loan which can be relied upon in the industry.
When a purchase price and other terms are agreed upon the buyer then completes the process of obtaining financing and the seller provides to the buyer necessary disclosure as applicable by national and state law. The buyer is also given time to make their own investigations and his lender requests an appraisal of the property to be completed to determine the value with regards to lending. Other reports such as a termite inspection and title report are done during this period often referred to as “escrow” or “under contract.” The buyer's acceptance of these and other reports is necessary for consummating of the loan transaction. The review of anyone of these reports can cause a buyer to withdraw from the transaction or cause a renegotiation.
In addition to verifying a borrowers ability to close by issuing the RTC indicia (Part 1) the RTC method will also allow the sellers of properties who have performed these inspections and generated the necessary reports to have them posted to a secure website within the RTC system. This will allow for potential buyers to view the reports therefore allowing the buyer to accept them prior to going under contract and thus eliminating the possibility of a cancelled or renegotiated contract. These reports can be viewed by anyone entering the RTC method website or the seller can choose to only allow viewing to potential buyers who have been validated as being approved by the RTC system.
When both sellers and buyers choose to participate in the RTC system, the transaction will be able to close much quicker and with much more certainty. However, it is not necessary for all parties to participate.
Example: Seller can participate and not buyer. The buyer still benefits from having access to more information before tendering a contract to purchase. The seller benefits by knowing the buyer has reviewed the necessary reports and disclosures and accepts the same.
Buyer can participate and not seller. The seller benefits as a result of knowing they have a qualified buyer. The buyer benefits as a result of having the financing in place and being able to offer a stronger verified offer.